Page 13 - From Ghetto to Gucci: The Basic Principles of Flipping Houses

Foreclosure Investing – The Basics

Foreclosure investing is another consistent way to find housing that is less popular, because
there’s more risk involved. Foreclosure sales also vary greatly from state to state. Some states
have laws regarding foreclosures that make it extremely difficult to flip foreclosures, and other
states make it very easy to flip.

In Kansas for example, after purchasing a foreclosed property, the person who was foreclosed
on has a year to redeem the property, meaning that you do not have free and clear title to the
house, and thus cannot sell it, for that year. And if you do any work to the property, you run the
risk of the person scrounging up the funding to buy it simply by paying whatever you bought it
for at auction. If you bought a junker for $20,000, and then put $50,000 into the house in hopes
of selling for $90,000, that person would then be able to, at any point in time during the year, to
buy your house for $20,000, regardless of all the money that you put into it. Even if they don’t,
you still have to wait a year to sell the house! This makes foreclosure purchases a very
unappealing prospect in some states.

But Kansas is in many ways the exception rather than the rule. In many states, including
California and some of the biggest housing markets, foreclosures are quick and easy. When you
purchase foreclosures you’re only subject to a specific set of liens, and carry clear title of the
house outside of these liens. However, knowing what does stick and what does not stick are
very important in foreclosures. You’ll be responsible for paying off any liens on houses that are
not taken care of by the sale of the house.

In California for example, when a house goes through foreclosure, you’re essentially purchasing
title based on a mortgage that was taken out. When someone buys a house and they take out a
loan, that loan is in first position, as it is the first loan that is taken out on the property. When the
person takes out a second loan on the property, that loan is in second position. If they take out a
third, it’s third position, fourth, fourth position, and so on.

What this means is that when you go to a foreclosure sale, you need to know what position the
loan is that is going to the sale. A first position loan is more important than a second position, a
second more than a third, and so on. What this means is that if a second goes to sale and you
buy it, you are then responsible for paying the first as well. If a third goes to sale, you’re
responsible for paying both the first and the second. As a beginner, I strongly recommend that
you purchase nothing besides a first.

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